It was a stunning day for Hong Kong and China stocks on Friday, with an easing of China's quarantine rules building on Wall Street's rally the day before that was sparked by a hint that inflation may have peaked.
The Hang Seng Index in Hong Kong shot up 7.7%, the strongest showing in the region thanks to the Hong Kong dollar peg, although export-oriented and tech stocks did well across the board in Asia.
In semiconductor-driven Taiwan, the Taiex advanced 3.7%. Similarly, the Kospi in South Korea rode gains in chipmakers SK Hynix, up 4.9%, and Samsung Electronics (KR:005930), up 4.1%, for the overall market to close with a 3.4% gain.
Mainland China shares were again less ebullient than the Hong Kong market. The CSI 300 index of the largest listings in Shanghai and Shenzhen closed up 2.8%.
Hong Kong's gains were particularly large in Asia because the city has a Hong Kong dollar currency that is directly pegged to the U.S. dollar, at HK$7.78. Consequently, its monetary policy closely follows that in the United States.
Tech stocks in Hong Kong performed particularly well on Friday, with any easing of credit in the form of smaller and/or fewer interest rate hikes perceived as enabling the future growth of companies that borrow to fund expansion.
The Hang Seng Tech Index rose 9.5% on Friday. Data center developer GDS Holdings ( (GDS) and HK:9698) was the top tech-index performer, up by one-third of its entire value, or 32.7%, in Hong Kong, building on its 20.3% rise on Wall Street overnight.
Ming Yuan Cloud Group Holdings (HK:0909), which provides cloud-based data services for property developers, saw its shares rise 23.2%.
The easing inflation read in the United States on Thursday, with the 7.7% figure for October marking the lowest level since January, suggests that the pressure to hike interest rates in Hong Kong will also ease. As a result, the Hang Seng opened with a gain of more than 1,000 points, or 6.5%, and the easier quarantine rules in China added a small increment to the rally in afternoon trading.
It also has been interesting to watch the performance of dual-listed Asian companies. The world's largest chipmaker, Taiwan Semiconductor Manufacturing Corp. ( (TSM) and TW:2330), notched an 8.3% advance on Friday in Asia after moving 9.0% higher on Wall Street overnight.
Property plays pop
Beaten-down property plays once again led the way in Hong Kong. Not only has the Hong Kong stock market suffered Asia's biggest collapse this year, losing one-third of its value in the last 12 months, but tightening financial conditions in China have sapped credit from the real estate industry, causing prices to go into a tailspin and consumers to lose confidence in property purchases.
China's largest property developer, Country Garden ( (CTRYY) and HK:2007), was the Hang Seng's top performer, also up by almost one-third ( 31.3%). Its property management arm, CG Services (HK:6098), rose 18.9%, while rival developer Longfor Group (HK:0960) saw its shares shoot up 27.7%.
Interest rate increases in Hong Kong have contributed to a dour mood that's also darkened by the loss of civic freedoms in the city and the stalling of the Chinese economy. There was a downbeat update on the state of the Hong Kong economy, with GDP figures out on Friday that show the economy contracted 4.5% in the third quarter. That's the worst of three negative quarters in a row and the poorest showing since the start of the pandemic in early 2020.
Still, every one of the 73 constituents of the Hang Seng advanced on Friday, with double-digit percentage gains for 17 companies. On the Hang Seng Tech Index, half its 30 names posted a double-digit percentage advance.
Electric carmaker Nio ( (NIO) and HK:9866) saw its shares rise 18.3% after it reported earnings that showed a widening loss but strong sales. It had risen 11.8% on Wall Street. Xpeng ( (XPEV) and HK:9868), up 9.9%, and Li Auto ( (LI) and HK:2015), up 9.6%, moved higher in sympathy.
E-commerce platform JD.com ( (JD) and HK:9618) was among the strong performers, up 16.5%, with rival Alibaba Group Holding ( (BABA) and HK:9988) up 12.5%. Today marks the end of their "singles day" promotions revolving around 11/11. Like "Black Friday," Chinese retailers have expanded the event from one day to several weeks of promotions. This year, expectations have been for flat sales or slight growth given the downbeat consumer confidence in China.
On Friday, clothing manufacturer Shenzhou International ( (SHZHY) and HK:2313) rose 16.9%, serving as a major supplier to brands such as Nike (NKE) , Adidas (ADDYY) and Uniqlo. Chinese sportswear maker Li Ning ( (LNNGY) and HK:2331) was another noteworthy gainer, up 12.7%, and a beneficiary from any opening up in China.
China tweaks its Covid rules
The markets seem to be snatching at any positive bit of news about China's zero-Covid policy. While there has been tinkering and slight changes, the overall picture is still one of exceptionally tight control and social restrictions.
On Friday, China eased some of its rules, shortening quarantine by two days for close contacts of Covid cases and for inbound travelers. People must now spend five days in centralized government quarantine instead of seven days, still followed by three days of home observation.
China also removed a penalty for airlines if they import too many Covid cases. It is also now requiring only one negative lab test for Covid within 48 hours of boarding a flight to China instead of the two tests it was requiring.
But all these changes really only serve to remind that a) there are a lot of Covid rules and restrictions and b) lots of testing. The response to even a small outbreak of Covid is to restrict movement, shorten working hours and close businesses. It's all very complex and very disruptive.
Chinese President Xi Jinping led a meeting of China's central leadership on Thursday that reaffirmed that China "will unwaveringly stick to its dynamic zero-Covid policy," as explained in the Global Times. There are plenty of buzzwords that this is an "optimized" response that's "dynamic" featuring "precise measures."
Translation: if your area has high Covid cases, you'll get locked down. And China posted 10,729 new Covid cases on Thursday, its highest level since April. Guangdong Province, China's most productive, is one center of attention, with parts of the megacity of Guangzhou locked down.
Friday's gains were therefore really driven by the U.S. inflation reading more than any optimism that China is truly moving away from zero-Covid. The Hong Kong and China markets are currently a little too desperate for good news on that front.
Weak Asian currencies get a boost
Asian currencies have also strengthened rapidly after the weaker U.S. inflation figure. If inflation has indeed peaked, as the October readout suggests, the U.S. Federal Reserve may be nearing the end of its rate hike cycle, which has driven an extremely strong U.S. dollar against a whole range of currencies.
The Japanese yen is today sitting at ¥140.75 to the U.S. dollar after coming down from ¥151 in late October, its weakest level in 32 years. It has strengthened 3.9% in a day, from above ¥146 on Thursday.
The Chinese yuan also advanced to as strong as C¥7.09 to the U.S. dollar during Asian trading on Friday. That's 3.1% stronger than its level of C¥7.32 at the start of this month, most of the gains coming in the last day.
The Chinese government closely controls the yuan's exchange rate, as does the Singapore government with the Singapore dollar, which is managed against a basket of currencies and has also gained ground. But the movements of those currencies are less dramatic than the freely trading yen.